The absence of foreign flows is becoming more visible and vocal with every passing day. Net foreign assets eased by Rs 17 billion during third week of November, taking the quarter-to-date fall to Rs 44 billion.
Although, net foreign flows are still positive in the year so far, totalling Rs 80 billion compared to hefty outflow of Rs 342 billion in the same period last year, the quantum of inflow is very small to ensure the sustainability of this nascent economic recovery. Under the umbrella of IMF with ceilings to central bank borrowings and shortcomings in revenue generation, it is imperative for the government to attract foreign funding so that private borrowers aren't shoved on the sidewalk.
But, in the absence of these flows, government reliance on domestic sources including NSS, government securities to non-bank and banking entities is hurting the recovery process of industrial sector. Although, weekly monetary statements are not reflective of government borrowing from non-bank sources, latest quarterly fiscal accounts clarify that picture.
Fiscal position for the first quarter released by the Ministry of Finance shows that Rs 108 billion were raised from non-banking domestic sources for budgetary support compared to an average of Rs 58 billion in the previous four quarters.
On the other hand, federal borrowing from banking system was mere Rs 20 billion against an average of Rs 65 billion in the preceding four periods - somewhat mitigated inflationary pressure stemming from high power money creation.
With increased government expenditure to run state machinery, debt servicing and defence expenses, allocation on development remains largely neglected owing to the scarcity of resources. Hence, low prospects of future growth from public spending.
The government has allocated roughly Rs 200 billion for development in this year's budget from FoDP funds - something which hasn't really materialised as such. The non-materialisation of these funds is a double whammy; a) more reliance on domestic sources for fiscal financing resulting in the crowding out effect, and b) low expenditure on development - sacrificing poverty reduction and future growth. Now the picture of monetary aggregates for third week of November is not much different from the previous week. Currency-in-circulation in its pre-Eid cattle buying increased by Rs 6 billion taking the last three weeks surge to Rs 61 billion.
With the hike of Rs 4 billion each in other deposits with SBP and demand and time liabilities, the M2 surged by Rs 14 billion (0.27%). This took the year-to-date increase in money supply to 2.44 percent (Rs 125 bn) as compared to a fall of Rs 59 billion (1.25%) same period last year.
The government continued its dependence on domestic banking sources for fiscal borrowing by raising Rs 24 billion from commercial banks. With a net retirement of Rs 3 billion from central bank and commodity operations, the weekly toll of government borrowing stood at Rs 20 billion. Total government borrowing in the fiscal year so far amounts to Rs 177 billion with 93 percent of these loans taken from commercial banks.
Nonetheless, the private sector owing to some global recovery and slight pick in the industrial sector, especially procurement of cotton, slowly continued its borrowing for eighth consecutive week. The raising of Rs 16 billion this week takes cumulative credit to Rs 108 billion for the last eight weeks, after the retirement of Rs 95 billion in the first quarter.
Worrisomely, however, borrowings of Rs 83 billion by the non-government sector in the year-to-date are mainly concentrated - about 85 percent of it - in the public sector entities. And even more disturbing is the fact that the circular debt has climbed again to Rs 200 billion, after being reduced to mere Rs 50 billion following the issuance of Rs 85 billion worth of TFCs in September.
This can add further pressure on PSEs including PSO to raise credit to maintain adequate oil supply in the country. Until and unless power losses are eradicated by some means, the non-efficient borrowings by oil companies will keep on eating the left over share in credit available to the non-government sector.
(Feedback at ali.khizar@br-mail.com)

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KEY MONETARY AGGREGATES
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Rs (mn)                                                   AS OF
                                   21-Nov     14-Nov     Change
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Currency in Circulation           152,211    145,875      6,336
Total Demand & Time Deposits      (30,925)   (35,036)     4,111
Broad Money (M2)                  125,364    111,241     14,123
NFA                                80,001     97,084   (17,083)
NDA                                45,363     14,159     31,204
Net Government Borrowing          176,794    156,649     20,145
Borrowing for budgetary support   179,773    157,467     22,306
from SBP                           15,663     17,142    (1,479)
from scheduled banks              164,110    140,325     23,785
Commodity operation                (1,295)       926    (2,221)
Credit to non-govt sector          83,533     62,980     20,553
to private sector                  13,278     (2,865)    16,143
to PSEs                            71,059     66,648      4,411
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Source: SBP
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